By |Published On: June 8th, 2022|Categories: Research Insights, Active and Passive Investing|

Market commentators sometimes suggest that the equity ETF market is just a bunch of “index funds” that all do essentially the same thing: deliver undifferentiated stock market exposure.

How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few thousand different ways to capture the same basic risk/returns. To do so, we leverage our Portfolio Architect tool to quantify the active share of all US equity ETFs against the S&P 500 index (the king of indexes).

Active share is the percentage of a portfolio’s stock holdings that differ from its benchmark index (in this case, the S&P 500). The measure is based on the weightings of securities in a portfolio compared with those of its benchmark and can be used as a measure of the degree of a portfolio’s active management. An active share of 0, would imply there is a 0% difference between a given ETF and the SP500. An active share of 100 would imply there is a 100% difference in holdings/weights between a given ETF and the SP500. And then you have everything in between.

As a general rule of thumb, we consider any strategy with an active share of less than 30% to be a ‘closet index’, which refers to a strategy that is effectively the same as the underlying index it seeks to track.

Here is the distribution of active shares across the 1814 US Exchange Traded Equity ETFs we track in our database against SPY (what we use as the SP500 holdings benchmark).

Source: Portfolio Architect

Key Points:

  • A bit over 4% of all funds are S&P 500 closet-trackers. That’s a lot of clones — no doubt!
  • Nearly 60% of all funds have nothing to do with the S&P 500.
  • There is a lot of differentiation in the ETF market. And that’s healthy!

More Charts

Here we look at US Exchange Traded ETFs that only traffic in US stocks.

The left axis is the % of the universe and the right access is the sum of the AUM allocated to a given active share bucket.

Source: Alpha Architect and Factset

We do the same thing but with expense ratios:

Source: Alpha Architect and Factset

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.